WEAKNESSES

RISK ASSESSMENT

A mild recovery after a long recession

After three years of contracting GDP, precipitated by falling oil prices and prolonged by declining production at mature oil fields, the country is expected to return to muted growth in 2019. The first of the two floating oil production and storage units for the Kaombo project was brought onstream in July 2018, and the second is expected to start up in summer 2019, which should help to stem the decline in crude production. As a result, oil exports, which make up more than 90% of the total, are expected to be less of a dampener on external trade’s positive contribution to growth. External support, including China's new oil-backed credit facility, is expected to shore up public investment. In particular, the funds will be used to finance infrastructure projects (transport, water, communication, electricity) targeted in the 2018-2022 National Development Plan. Measures taken to reform the business climate, such as new laws preventing anti-competitive practices and ending local partnership requirements, could attract the interest of private investors. However, weak infrastructure, slow and inefficient institutions, and corruption will continue to constrain the private sector's contribution to gross fixed capital formation. Private consumption is expected to recover modestly as households and businesses benefit from the improved availability of liquidity following kwanza depreciation. However, inflation, which remains high, and the introduction of a VAT in July 2019 will continue to be a drag on household purchasing power.

Risk of over-indebtedness still significant

In 2019, continued fiscal consolidation efforts are expected to result in a reduction in the deficit. While oil revenues are set to increase slightly, it is mainly higher non-oil revenues that contribute to the deficit reduction, thanks in particular to the introduction of VAT. Expenditure will remain dominated by debt service, which is poised to absorb almost 50% of the revenues generated. Capital investment, after significant cuts in recent years, should be maintained. Expenditures on health, education, and agriculture is expected to increase at the expense of defence spending. Bilateral (China and Portugal in particular) and multilateral financing should make it possible to finance the deficit. Plans for full or partial privatisations, including of the oil company Sonangol, could also contribute to the financing. After peaking in 2018, mainly due to the depreciation of the kwanza, public debt – which is more than 50% denominated in foreign currency – is expected to decline in 2019. Nevertheless, the risk of over-indebtedness remains substantial. In addition, the banking sector remains in precarious health, as the quality of assets has deteriorated after years of low activity.

The current account deficit should stay relatively stable in 2019, reflecting the small change in the trade surplus, as the moderate increase in export earnings is partially offset by imports of capital goods. The service and income deficits, largely related to oil activity, could shrink slightly, in line with activity levels in the sector, which remain moderate. Remittances by foreign workers based in Angola are expected to continue to contribute to the transfer deficit. A recovery in FDI and the use of foreign exchange reserves – which are still sufficient to cover more than six months of imports, despite falling by half between 2013 and 2018 – should make it possible to finance the current account deficit. Both the more flexible exchange rate system introduced by the central bank in January 2018 and the kwanza’s more than 40% depreciation have helped to ease the pressure on the external accounts. The official and parallel market rates for the kwanza are expected to continue converging in 2019. The depreciation of the official rate and foreign exchange inflows (thanks to the oil sector) should allow foreign exchange reserves to be replenished in 2019.

Despite reforms, socio-economic challenges remain

Following the general elections of August 2017, unsurprisingly won by the Popular Movement for the Liberation of Angola (MPLA), João Lourenço became President, taking over from José Eduardo dos Santos, who had spent 38 years at the helm of the country. Also succeeding Mr dos Santos as head of the MPLA in September 2018, former Defence Minister Mr Lourenço initiated numerous reforms aimed at reducing the influence of the dos Santos family on the economy, improving the perception of the business climate and getting the country out of the crisis. However, while judicial investigations targeting the former President’s children, Isabel and José Filomeno dos Santos, have sent a strong signal in the fight against corruption, the country will struggle to shake off its reputation for corruption. More generally, major socio-economic challenges remain. High inflation, the expected increase in VAT and the protracted economic crisis will continue to be sources of social unrest within a population suffering from poverty, persistent inequalities, and poor access to housing, education and health services. Economically, despite the reforms, the business environment remains extremely challenging, as evidenced by the country's 173rd place (out of 190) in the 2019 Doing Business ranking. In particular, insolvency proceedings remain time-consuming and cumbersome. Externally, the issue of refugees from the Kasai region will continue to affect relations with the Democratic Republic of the Congo.